my toxic inheritance

[JBTX]

JBTX, that is why I was asking if he got a salary... you put it more bluntly, but it is the direction I was going...

It also seems like he does not want to do the work... so any reasonable salary is a no go....

I still think if you cannot sell the shares then just let it liquidate and take whatever if your share...

Correct. The company is worth nothing, at least in terms of earnings. Having the CEO work for free gives the illusion the company is worth something.

If there are no takers then walk away and let it crumble.

If OP liked the work, then demand a reasonable salary. Of course he won’t get it, because then there will be no earnings.

There is no way I would work and effectively give away most of my salary to others who do nothing. I’d be angry every day about it.

Op needs to get over the illusion there is value to this company. There isn’t, at least as it is currently structured.

 

[youbet]

I still think if you cannot sell the shares then just let it liquidate and take whatever if your share...

+1

Much consternation over nothing. Liquidate and split the proceeds as dictated by the legal organization documents.

 

[Out of Steam]

Or demand a market-rate salary for what you do.

Beyond the start-up phase of a company, this should be a given. Owners of many small companies kid themselves about their firm being a going concern, when it is surviving only by the Herculean efforts of an unpaid proprietor.

 

[CaliKid]

This is an interesting post. Some thoughts:
1) There are companies that have fractional/part-time CFOs so I assume a fractional/part-time CEO is a possibility. If the company isn't profitable enough to pay someone (even part-time) than how valuable could the business be!? It's just a job is all you have right now it sounds like.
2) Perhaps a business broker could find a buyer? Again though I can't imagine value being much for a fractional ownership of a low profit business!?
3) What about buying out the others? Then you'd be in total control. Ramp up the biz for a few years and then sell it as a going concern.

 

[pb4uski]

In our family LLC that my 4 sisters and I are members, if a member wants out they have to first offer their units to the Company (effectively at this point their siblings collectively). If the Company doesn't buy their units then they need to offer them on the same terms as offered to the Company to the other Members. If one or more other Members don't buy their units then they have 60 days to sell them to someone else.

The buyer will be an Assignee and eligible for all the benefits and obligations of membership except the right to vote on Company matters. However, if 60% of the Members vote for the buyer to become a full member then they also get the right to vote on Company matters.

 

[socca]

Correct. The company is worth nothing, at least in terms of earnings. Having the CEO work for free gives the illusion the company is worth something.

If there are no takers then walk away and let it crumble.

If OP liked the work, then demand a reasonable salary. Of course he won’t get it, because then there will be no earnings.
...

(1) The liquidation value of the company is high based on the disposition of a similar company I managed last year. The return on assets is low because of the nature of the business and some poor management practices I inherited that aren't easy to fix.
(2) Just walking away and letting it crumble has problems, too. For example, there are long-time employees and other stakeholders who would be negatively affected. Furthermore, the liquidation value of a biz after operations have fallen apart is likely to be lower than the liquidation of a reasonably healthy ongoing concern.
(3) All talk of salary is irrelevant to my situation. I need more time, not more money.

 

[socca]

This is an interesting post. Some thoughts:
1) There are companies that have fractional/part-time CFOs so I assume a fractional/part-time CEO is a possibility. If the company isn't profitable enough to pay someone (even part-time) than how valuable could the business be!? It's just a job is all you have right now it sounds like.
2) Perhaps a business broker could find a buyer? Again though I can't imagine value being much for a fractional ownership of a low profit business!?
3) What about buying out the others? Then you'd be in total control. Ramp up the biz for a few years and then sell it as a going concern.

(1) A fractional CEO would have to be trained and then managed. And when I micro-manage her to the point that she quits in disgust I'd be back to square one.
(2) I wasn't aware that business brokers deal with minority-ownership stock in private companies. Seems unlikely. Any outsider who bought my stock would want the company liquidated (maybe soon).
(3) I can't afford to buy out all of the other stockholders. I can afford, however, to buyout some of the other owners. The additional control/influence that would result might be useful. Thanks for the suggestion.

 

[Qs Laptop]

(2) I wasn't aware that business brokers deal with minority-ownership stock in private companies. Seems unlikely. Any outsider who bought my stock would want the company liquidated (maybe soon).

(3) I can't afford to buy out all of the other stockholders. I can afford, however, to buyout some of the other owners. The additional control/influence that would result might be useful. Thanks for the suggestion.

Buy out enough shareholders so you are the plurality owner. Call for a shareholder meeting. At the meeting nominate yourself to be on the board of directors. Use your voting leverage to get on the board.

Get a Drag Along, Tag Along agreement drawn up by an attorney. A drag along, tag along agreement binds the minority shareholders to sell their shares to a buyer along with the majority shareholder. In this way if a buyer is found to buy the company the other shareholders are legally required to sell their shares along with yours (assuming you hold the most number of shares.)

Tell the board you think the company should be sold. Introduce the drag along, tag along agreement to other shareholders and see if they will sign it. If they don't want to sign then they are not serious about selling the company. At least now you have some clarity on that option and perhaps can come up with another course of action.

 

[Texas Proud]

(1) The liquidation value of the company is high based on the disposition of a similar company I managed last year. The return on assets is low because of the nature of the business and some poor management practices I inherited that aren't easy to fix.
(2) Just walking away and letting it crumble has problems, too. For example, there are long-time employees and other stakeholders who would be negatively affected. Furthermore, the liquidation value of a biz after operations have fallen apart is likely to be lower than the liquidation of a reasonably healthy ongoing concern.
(3) All talk of salary is irrelevant to my situation. I need more time, not more money.

Not to be too harsh but this sounds like an excuse...

Let's look at #3.... the ONLY way to get more time is to stop working... but you keep saying that you cannot even though you say the liquidation value of the company is high... if it is high let someone else handle the problems and you cash out.. it is not your responsibility to take care of any long term employee... if it would go down if you were not there then it is not high... the whole point of liquidation value is you actually liquidate it and someone else takes it over or parts of it (it can be split up in a liquidation)...

I used to tell employees and bosses that thought someone could not replace them that they had a high opinion of themself... there IS someone that can do it... you just have to find them... and if the business is so good then it should be able to afford them...

And since you do not need any more money it would be easy for me to just walk away... heck, I might even sell the shares to the long time employees...

 

[socca]

... Get a Drag Along, Tag Along agreement drawn up by an attorney. ...

Thanks for the hint. Might not be appropriate for our situation but it's nice to know the options.

 

[socca]

... And since you do not need any more money it would be easy for me to just walk away... heck, I might even sell the shares to the long time employees ...

Family businesses are complicated. What seems 'logical' may not fly due to years of emotional baggage and lingering resentments. The long-time employees aren't in a financial position to purchase shares. I know this because they tend to be treated like de-facto family members and share more personal info than usually happens in a professional setting.

 

[OldShooter]

Buy out enough shareholders so you are the plurality owner. Call for a shareholder meeting. At the meeting nominate yourself to be on the board of directors. Use your voting leverage to get on the board.

Remember that you do not have to have a majority of shares to do this. You just need to control a majority. Maybe you can get some of the other shareholders to agree to vote with you.

Ref my earlier post, though. You should understand what rights the minority shareholders (including you) have. This will vary from state to state.

 

[CRLLS]

Family businesses are complicated. What seems 'logical' may not fly due to years of emotional baggage and lingering resentments. .....

I have seen this in a sibling-inherited business that was going through some short-term financial difficulties. The 2 non-working siblings decided they would vote out the one working one, the president and manager, when he refused to put his personal home up as collateral for a business loan. Of course, the other 2 wouldn't or couldn't do it either. The two then fired the one in charge and he lost everything he had worked for all of his career. To top it off, the business soon failed afterwards. Nobody won, and the family was forever divided.

Some small companies have more drama than big corporations. If you can't or won't act in the best interest of the company, you can either suck it up or leave. The chance of swaying any one or two to vote with you, is pretty slim.

 

[Qs Laptop]

Remember that you do not have to have a majority of shares to do this. You just need to control a majority. Maybe you can get some of the other shareholders to agree to vote with you.

Ref my earlier post, though. You should understand what rights the minority shareholders (including you) have. This will vary from state to state.

Yes, I'm aware that one does not need to be the majority shareholder to do this action. That's why I used the term "plurality." Just have more shares than any other individual. Then try to build a coalition, as you suggested (and I implied.)

 

[pb4uski]

.... 3) I can't afford to buy out all of the other stockholders. I can afford, however, to buyout some of the other owners. The additional control/influence that would result might be useful. Thanks for the suggestion.

Perhaps you can. If the business has decent cash flow and no debt then consider a leveraged buyout... the business borrows and the proceeds from the borrowing are used to buy out the troublesome shareholders so less shares are outstanding leaving you and the less troublesome shareholders to control the business going forward. Hard to tell without numbers but you may be able to gain majority control.

 

[pb4uski]

I have seen this in a sibling-inherited business that was going through some short-term financial difficulties. The 2 non-working siblings decided they would vote out the one working one, the president and manager, when he refused to put his personal home up as collateral for a business loan. Of course, the other 2 wouldn't or couldn't do it either. The two then fired the one in charge and he lost everything he had worked for all of his career. To top it off, the business soon failed afterwards. Nobody won, and the family was forever divided. ...

Hard, but to be "forever divided" from those 2 non-working bozos might not be the worst thing to happen.

 

[Qs Laptop]

Perhaps you can. If the business has decent cash flow and no debt then consider a leveraged buyout... the business borrows and the proceeds from the borrowing are used to buy out the troublesome shareholders so less shares are outstanding leaving you and the less troublesome shareholders to control the business going forward. Hard to tell without numbers but you may be able to gain majority control.

This is another good suggestion but be aware that the tax laws regarding corporate stock buy-backs were changed a couple years ago to make it less attractive of an option. Also, who is going to personally guarantee the loan?

 

[folivier]

Having 2 siblings who destroyed a family inheritance that was being run as a pseudo business I say they got what they deserved. They just dragged me along with their destructive decisions since I had only vote out of 3.
Don't let this happen to you, get out while you can. And don't worry about family, they'll dislike you whatever you do.
Like I said earlier don't let your emotions rule your decision. If this decision is causing you these problems then you need to get out any way you can. Time>money<happiness.

 

[socca]

This is another good suggestion but be aware that the tax laws regarding corporate stock buy-backs were changed a couple years ago to make it less attractive of an option. Also, who is going to personally guarantee the loan?

A while back I contacted some banks about loaning the company some money that could be used to buy back my stock at a deep discount to liquidation value. Some notes:
• the banks didn't seem enthusiastic about the intended purpose for the money. Business expansion: ok; stockholder buyout: not so good.
• the banks implied that someone would need to guarantee the loan. This was a surprise because since the company would be borrowing the money I figured that only the company financials would matter. I guess the bankers love reducing their risk however possible.
• one bank only needed two past years of financial statements, which was a surprise because this would provide a distorted view of the company's inherent profitability (the last two years have had net income far above average).
So, after a few attempts I abandoned this particular escape route.

A problem with my earlier idea of an exchange dedicated to the purchase & sale of private company stock: as a seller how do you distinguish between bona fide buyers and those who merely enjoy perusing the financials of private companies? One idea: require a steep entry fee to become a "member" of the exchange. This wouldn't be perfect but might help.

 

[OldShooter]

... • the banks implied that someone would need to guarantee the loan. This was a surprise because since the company would be borrowing the money I figured that only the company financials would matter. ...

Requiring personal guarantees is pretty routine in the small business loan world. IMO you're going to find that anywhere; they are testing whether you have confidence in the company as much as just adding collateral.

 

[pb4uski]

A while back I contacted some banks about loaning the company some money that could be used to buy back my stock at a deep discount to liquidation value. Some notes:
• the banks didn't seem enthusiastic about the intended purpose for the money. Business expansion: ok; stockholder buyout: not so good.
• the banks implied that someone would need to guarantee the loan. This was a surprise because since the company would be borrowing the money I figured that only the company financials would matter. I guess the bankers love reducing their risk however possible.
• one bank only needed two past years of financial statements, which was a surprise because this would provide a distorted view of the company's inherent profitability (the last two years have had net income far above average).
So, after a few attempts I abandoned this particular escape route.

A problem with my earlier idea of an exchange dedicated to the purchase & sale of private company stock: as a seller how do you distinguish between bona fide buyers and those who merely enjoy perusing the financials of private companies? One idea: require a steep entry fee to become a "member" of the exchange. This wouldn't be perfect but might help.

Might you be able to do it directly with the troublesome shareholders? IOW, they sell their stock to the company in exchange for a promissory note with periodic payments plus interest. Also, the Company has the right to prepay if it wishes to. Sort of like selling property with owner financing.

 

[JBTX]

(1) The liquidation value of the company is high based on the disposition of a similar company I managed last year. The return on assets is low because of the nature of the business and some poor management practices I inherited that aren't easy to fix.
(2) Just walking away and letting it crumble has problems, too. For example, there are long-time employees and other stakeholders who would be negatively affected. Furthermore, the liquidation value of a biz after operations have fallen apart is likely to be lower than the liquidation of a reasonably healthy ongoing concern.
(3) All talk of salary is irrelevant to my situation. I need more time, not more money.

All due respect you are all over the board here. If the liquidation value is high, as the business is running, then sell it! Seems like other shareholders would want to sell if liquidation value is high. If they don’t want to sell, it doesn’t matter what the liquidation value is. They are content to benefit from the fruits of your free work.

If the liquidation value would be high if the problems were fixed, well that’s not what you have. By your own admission they are hard to fix. So you can spend years trying to fix it, or find an exit path.

If fixing it is possible, hire a competent CEO to fix it. If the business has value, it should support a CEO.

If you want to just keep working for the company, you don’t need permission from us. It seems like you have an answer/excuse for everything….

 

[Qs Laptop]

A problem with my earlier idea of an exchange dedicated to the purchase & sale of private company stock: as a seller how do you distinguish between bona fide buyers and those who merely enjoy perusing the financials of private companies? One idea: require a steep entry fee to become a "member" of the exchange. This wouldn't be perfect but might help.

You each sign a non-disclosure agreement. When the prospective buyer asks to see financial statements you tell them you will provide them so long as they provide their financial statements. If they balk, you can say, "I need to know that you are serious and have the wherewithal to purchase my company." This should eliminate the pretenders.

 

[Qs Laptop]

Might you be able to do it directly with the troublesome shareholders? IOW, they sell their stock to the company in exchange for a promissory note with periodic payments plus interest. Also, the Company has the right to prepay if it wishes to. Sort of like selling property with owner financing.

That arrangement of financing the buyback of stock is not going to look attractive to prospective buyers. Which prospective buyer would want to purchase that debt? (I realize it's all going to "come out in the wash" so to speak since buyer is purchasing the stock...)

Also, buying back stock is typically done when the company has a strong cash position. Financing the buying back of stock is not a good use of the company's capital, as the OP found out when banks would not lend to buy back stock.

 

[pb4uski]

That arrangement of financing the buyback of stock is not going to look attractive to prospective buyers. Which prospective buyer would want to purchase that debt? (I realize it's all going to "come out in the wash" so to speak since buyer is purchasing the stock...)

Also, buying back stock is typically done when the company has a strong cash position. Financing the buying back of stock is not a good use of the company's capital, as the OP found out when banks would not lend to buy back stock.

I didn't have prospective buyers in mind, more just a way for the OP to gain control so the more idiot shareholders would be out of the way.

I don't think the resulting debt would bother potential buyers at all. They would just plan to buy all the outstanding stock and pay off the debt and evaluate if the operations cash flows in relation to their total investment, no different than if none of the shareholders had been taken out.

IME banks tend to be very conservative to CYA. If a company has strong cash flow to service the debt they'll still ask for personal guarantees, a belts AND suspenders thing... so I wouldn't read too much into what the bank said.